Lack of special dividend signals CBA’s caution

So Commonwealth Bank of Australia didn’t deliver a special dividend. Let the gnashing and wailing begin.

But apart from that, a disappointment in this yield-starved investment world, it’s pretty hard to pick fault with another assured result from
Ian Narev
’s shop. Indeed, one bordering on too good – raising suspicions that maybe the banks are doing it a little too easy at the moment.

Narev’s take is the banks in general can’t consistently outstrip growth in the economy, but he does believe CBA still has the capacity to take market share, improve productivity – one of the strengths of Wednesday profit – and exploit new opportunities from its now-finished core technology project.

This result was strong across the board, on revenue, on margins, on productivity, on return on equity, on customer satisfaction. But it was particularly good on impairment charges. Indeed, to the extent the profit beat market expectations for cash earnings by about $200 million, lower impairment charges were a major factor along with some volatile trading numbers.

Yet there was no extra handout to shareholders and the question must be why? Neither Narev nor chief financial officer
David Craig
answered that explicitly but Narev noted while CBA saw potential positive signs ahead, threats remained.

So CBA is not about to establish a precedent in capital returns beyond neutralising the capital growth from its popular dividend reinvestment scheme.

Sustained up-tick

CBA has identified a sustained up-tick in loans more than 90 days past due in credit cards and personal lending but credit quality in mortgages continues to improve.So too is the outlook in business lending good.

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In answer to questions on Wednesday, Narev, Craig and risk boss
Alden Toevs
cautioned against reading anything into impairment trends at this stage, but the bank has maintained the discretionary overlay in its provisioning for future bad debt.

Narev has already expressed wariness that some borrowers may not cope if interest rates lift off historic lows. (Although he stressed Australian regulators and the bank itself was very comfortable with the serviceability of the mortgage book.) Business confidence remains poor.

For the last year though, CBA’s performance was clearly that of a market leader. While ROE fell slightly from 18.6 to 18.4 per cent it remains strong. The dividend itself is higher and in line with the bank’s guidance.

Sales have improved above system growth in most sectors and both wealth and retail products were strong.

CBA again made much of its claimed technology leadership but beyond the marketing the most impressive element is the productivity story. In short, CBA is improving customer satisfaction and sales with fewer staff.

Each staff member in areas like retail are servicing more customers but more importantly converting more leads into sales.

Products per customer are up to 3 from 2.83 while there’s been a 4 per cent increase in transactions per staff member and 10 per cent improvement in converted referrals.

Revenues grow faster than costs

With the bank now sitting on top of the customer satisfaction tables for all sectors – at least if you use the surveys CBA does (which are reputable) – that sort of productivity gain looks very sustainable and will prove a strength if a weaker economy becomes entrenched.

CBA grew revenues faster than costs, improving that key ratio, while it was able to reprice loans enough to offset more expensive funding – particularly retail deposits – and lift margins.

Setting aside for the moment the major issue of the economy, CBA will also have some tailwinds going into this year.

It is now well set on both the capital and liquidity fronts – regulators have formally approved current settings – which means the cost of growing those ratios is passed.

The hump of investment spend on the core bank technology project has passed – 16 per cent of last year’s spend – too but the benefits of that will continue to be cashed in.

The story of this result though remains the lack of the widely expected special dividend – and particularly what that tells us about the view of Australia’s largest bank: cautiously optimistic but holding back.

As Narev said the broader economy and what happens globally is out of his control.